At the heart of the President Barack Obama's ambitious plan to
rescue the housing market is the conviction that restructuring
distressed mortgages will keep struggling borrowers in their homes
and help insert a floor beneath plummeting property values.
With $75 billion dedicated to reworking troubled loans, that's
a big bet—especially considering that a top banking regulator
said last December that almost 53 percent of loans modified in
the first quarter of 2008 went bad again within six months. But
supporters argue that mortgage modifications need to be properly
engineered to work—and many early ones weren't.
To that end, the Obama administration on Wednesday unveiled fresh
details on its plan to restructure at-risk loans and help as many
as four million home owners avoid foreclosure.
Here are seven things you need to know about Obama's loan modification
1. Payments, not prices:
The plan centers on the belief that struggling borrowers will
stay in their homes—even as values decline sharply—as
long as they can make their monthly payments. Although not everyone
agrees with this, billionaire investor Warren Buffett endorsed
the philosophy in his most recent letter to shareholders. "Commentary
about the current housing crisis often ignores the crucial fact
that most foreclosures do not occur because a house is worth less
than its mortgage (so-called “upside-down” loans),"
Buffett wrote. "Rather, foreclosures take place because borrowers
can’t pay the monthly payment that they agreed to pay."
2. Thirty-one percent:
To that end, the administration's plan requires participating
loan servicers to reduce monthly payments to no more than 38 percent
of the borrower's gross monthly income. The government would then
chip in to bring payments down further, to no more than 31 percent
of the borrower's monthly income. In lowering the payment, the
servicer would first reduce the interest rate to as low as 2 percent.
If that's not enough to hit the 31 percent threshold, they would
then extend the terms of the loan to up to 40 years. If that's
still not enough, the servicer would forebear loan principal at
no interest. The plan does not, however, require servicers to
reduce mortgage principal, which Richard Green, the director of
the Lusk Center for Real Estate at USC, considers a shortcoming.
"For underwater loans, if you don't write down the balance
to be less than the value of the house, people still have an incentive
to default," Green says. "Writing down the principal
first instead of last—which is what [the Obama administration
is] proposing—makes sense to me."
3. Cash incentives:
To encourage participation, servicers will be paid $1,000 for
each modification and will get an additional $1,000 payout each
year for as many as three years, as long as the borrower continues
making payments. Borrowers, meanwhile, can get up to $1,000 knocked
off the principal of their loan each year for as many as five
years if they make their payments on time. Neither party can receive
the cash incentives until the modified loan payments have been
made for at least three months.
4. Financial hardship:
The Obama administration is pitching its plan as an effort to
help responsible homeowners ensnared in the historic housing slump
and painful recession—not speculators. As such, only owner-occupied,
primary residences with outstanding principal balances of up to
$729,750 are eligible. Occupancy status will be verified through
documents, such as the borrower's credit report. In addition,
the program is designed to target homeowners who are undergoing
"serious hardships"—such as a loss of income—which
have put them at risk of default. To participate, borrowers will
have to sign an affidavit of financial hardship and verify their
income with documents. "If we would have had such stringent
verification over the last four or five years, we probably wouldn't
be in as bad a position as we are in," says Richard Moody,
the chief economist at Mission Residential. But while Moody has
no objection to such verification, obtaining documents from so
many homeowners could be an onerous effort. "It's going to
be a very time-consuming process," he says. Only loans originated
on or before Jan. 1, 2009, are eligible, and modified payments
will remain in place for five years. Now that the administration's
plan is out, lenders are free to begin modifying loans.
5. Net present value:
To determine if a particular mortgage will be modified, the
servicer will perform a so-called net present value test. The
test compares the expected cash flow that the loan would generate
if it is modified with the expected cash flow it would generate
if it isn't. If the modified loan is expected to produce more
cash flow for the mortgage holder, the servicer is to restructure
6. Second liens
The Obama plan also addresses the issue of second liens—such
as home equity loans or home equity lines of credit—by offering
incentives to extinguish them. But key details on this component
of the plan remained unclear.
7. Will it work?
Moody argues that while the plan may reduce foreclosures for
primary residences, it could lead to a spike in defaults for another
group of homeowners
. Although he supports the administration's efforts to focus the
initiative on primary residences, Moody notes that "it could
be the case that a lot of [real estate speculators] have been
just hanging on waiting to see exactly what the details are of
this [plan]," Moody says. Now that it's clear the Obama plan
leaves speculators out, "we could actually see a spike in
foreclosures or at least mortgage defaults among this group."
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mail that they can help you for a fee. I have had many of my friends
ripped of by these scammers. Only you can help yourself by talking
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